Can farmers ever be price setters, not just price takers?
New Zealand sheep and beef producer James Parsons believes they can.
"Farmers are traditionally a fragmented group, and that puts them on the back foot when dealing with large multi-national organisations that control the supply chain," he said.
"The solution is to become that link in the chain that is vital to the success of the entire chain, and if this is not easily replicated then the result is market power."
Idealistic perhaps? James agrees, but still believes there are opportunities for farmers to collaborate so that there is a more balanced discussion about price setting with large buying groups.
At just 35, James is the youngest director of Beef and Lamb New Zealand and is trying to change the culture of an industry long steeped in a tradition of "independence, poor communication and mistrust".
"The auction system, in particular, is one of these traditions, which is fine if you just want to sell a commodity," he said.
"However those interested in building a niche value-added product should steer clear of an auction because it results in value destruction.
"A true value chain requires outstanding communication and trust between all the chain partners. By comparison an auction is a communication void.
"Putting it crudely, it is like a 'one night stand' between a buyer and seller.
"New Zealand sheep and beef farmers, like virtually all sheep and beef farmers around the world, are grappling with an imbalance of power in their supply chains."
James said the most consolidated link in the chain stipulated the price.
"Farmers are price takers because there are so many of us and we don't work together," he said.
"Put simply, there are truckloads of farmers who sell to only a handful of buyers. Naturally, these buyers have the upper hand."
James farms sheep and cattle on 370 hectares at the very north tip of the north island of New Zealand.
His passion for the sheep and beef industry won him a Nuffield Scholarship, which he described as an "incredible intellectual journey of a lifetime".
His studies took him to five continents in six months, and gave him access to retailers and importers across the globe, helping him to build greater understanding of the complexities of modern supply chain management.
NZ accounts for more than 60 per cent of globally traded lamb, so any shortfall in production there impacts on supply, and therefore prices, in the rest of the world.
In 2011, because of a shortage of supply, lamb prices were more than $NZ7/kg. They are now at just $NZ4.80/kg, which, James says, is only marginally above break-even levels.
"In 2008, New Zealand lamb prices at the farm gate were very depressed, and yet what puzzled me as I travelled to other countries were the amazing prices North American and European lamb producers, selling into the same market, were receiving by comparison," he said.
"When I talked to retailers and importers in North America, Europe and the UK, I continually asked them why they would pay less for New Zealand lamb, compared to their own domestically produced product. The standard answer I received was 'NZ's cost of production was lower'.
"But wouldn't you think because of all our hard work and innovation, that any cost efficiencies we'd created would be to the benefit of NZ producers, not someone offshore?
"It took me a while to realise that that was just the reality of the way supply chains work. A key learning for me was that if you create cost efficiencies, you need to bank them as a sector."
Tragically, James said, NZ farmers had traded these efficiencies away in terms of cheaper product, simply through their fragmented meat industry structure.
He said one of the practical outcomes of his Nuffield research was a decision to become a member of the NZ-based Firstlight Wagyu Producer Group.
"While there are lots of different groups playing in the Wagyu sandpit, we are the only group to my knowledge that focuses exclusively on producing and marketing branded grass-fed Wagyu, as opposed to grain-fed Wagyu," James said.
The Firstlight Wagyu Producer Group is made up of more than 30 farmers from across the North Island, and importantly, the group now owns some Wagyu genetics that allow the meat to marble exceptionally well off grass finishing.
"We're trying to control as much of that supply chain as possible," James said.
He said while innovation was important in any industry, it was also essential to ensure this market advantage could not be replicated.
"The niche products of today are the commodities of tomorrow," James said.
"It's natural that if you are onto a winner everyone else wants a slice of the action and will replicate what you do in a heart beat.
"To mitigate this, it is vital that a producer group owns or controls their intellectual property. Brands and genetics are important real estate within the supply chain.
"The other thing that is exceptionally hard to replicate in our case is the great culture and focus our Firstlight Wagyu Producer Group has.
"This goes a long way to providing a quality product for our customers all over the globe."
James said the NZ commodity supply chains were complex, and highly dysfunctional.
"They are built on an archaic system of buy-low, sell-high up and down the chain. I've become a real believer in the value chain philosophy where all chain partners collectively grow the pie as opposed to competing for individual slices," he said.
"But at the same time producers must participate in any value chain with enough collective strength to make sure they aren't unfairly squeezed on price.
"Instead of being retail-led value chains, farmers need to start building producer-led chains.
"After my Nuffield research, I came to the view that you need to play by the rules of the game.
"But I'm optimistic. By and large farmers produce a great product, producers just need to be smarter about the structure of their respective supply chains and how they can best fit into these to future proof their businesses."
For more information visit www.firstlightfoods.co.nz
Nuffield Report Linkhttp://www.nuffield.org.nz/uploads/
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